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With increasing volatility in the equity markets and stiffening competition among brokerages, more and more institutions are adopting technology to use algorithmic and high frequency trading (HFT) to stay in the race.

According to stock exchange data, algorithmic trading accounted for 14.94% and 20.78% of total cash market turnover on BSE and NSE, respectively, in February 2013.

According to BSE, the share of algo trading has never been so high before.

While NSE declined to share the historical data related to the share of algo trading, information on BSE website clearly shows that algos have gained immense popularity in the recent months. For instance, algo accounted for less than 10% of the total turnover in December last year and stayed in the range of 5-8% for most part of 2012.

Algo trading refers to the use of computer programs to execute trades in the stock, commodity or other financial markets. These programs execute trades as and when the pre-defined parameters related to price, timing, quantity are triggered. Complex trading strategies can also be implemented using algos.

Market experts say that technology — by way of algo-based trading and HFT — continues to play a big role in changing the brokerage industry as it helps in executing orders in fraction of a second with utmost efficiency, accuracy and without human intervention.

“Technology is playing a huge role. It might replace human beings one day, although not completely. If the same task could done with the help of a machine in more efficient and time saving manner, why would you not invest in it?”

Market experts said that these software have advanced in such a way that one can do derivatives rollover by a click of a button. “Earlier a dealer had to sit in front of the screen and manually feed the order. It was time-consuming and a costly affair”.

“Proprietary desk of international brokerages the world over wanted DMA into Indian equities so that they could punch their orders using algos without the need of a broker in India…While the concerns raised by the market regulator are appreciated, I do not think the regulator can take a step back.”

The RBI had highlighted the risks attached to algorithmic trading in its June 2012 Financial Stability Report. The report stated that several instances of extreme volatility and disruptions were witnessed in Indian stock markets that could be directly and indirectly attributed to the increased use of algorithmic trading.